Investment Climate Assessment
FINAL REPORT
October2007
World Bank
Regional Program for Enterprise Development (RPED)
AfricaFinance and Private Sector (AFTFP)
Table of contents
LISTING OF BOXES, FIGURES AND TABLES
acknowledgements
executive summary
Introduction
Objective and Rational of the Report
1Social context and macroeconomic background
1.1Socio-geographic Characteristics
1.2Policy choices and structural changes
1.3The Economic Outlook: Oil Is Well That Ends Well
2The business environment
2.1Formal Sector: Perceived Constraints
2.2Electricity
2.3Corruption and Crime
2.4Regulatory Framework
2.5Transportation and Other Constraints
3Micro firms
3.1Constraints to Business
3.2Comparison between formal sector and micro firms
4Factor markets: financial sector, labor and land market
4.1The Financing of Firms in Angola
4.2The Formal Labor Market in Angola
4.3Land Market
5Manufacturing and firm’s productivity
5.1Labor Productivity and Labor Cost
5.2Total Factor Productivity and Investment Climate Determinants
6Synthesis of results and policy recommendations
6.1Constraints to Business
6.2Financial Market
6.3Productivity
6.4Policy Recommendations
Annex A: Technical appendix for productivity calculations
LISTING OF BOXES, FIGURES AND TABLES
Boxes: / Page1 What is an Investment Climate Assessment? / 12
Listing of Figures:
1.1Oil Dependency for Selected Countries / 18
1.2Evolution of Angola’s Real GDP Per Capita, 1960-2004 / 20
1.3Angola: Real GDP growth (1990-2006) / 22
1.4Progress in Macroeconomic Indicators / 23
1.5Curbing Inflation / 24
1.6Tradable and Nontradable Inflation Rates / 25
2.1Top 6 Major or Very Severe Constraints as Reported by All Formal Sector Firms in Percentages / 28
2.2Costs of Security and Theft – International Comparisons / 36
3.1Percentage of Firms Reporting Major or Very Severe Constraints (Top 6 Constraints for Formal Sector) – Formal Sector versus Micro Firms / 47
3.2Indirect Costs – Formal Sector versus Micro Firms / 48
5.1Labor Productivity – International Comparison / 65
5.2Labor Cost per Employee (U.S. Dollars) – Manufacturing Sector / 66
5.3Unit Labor Cost – International Comparison / 67
5.4Capital per Employee – International Comparison / 67
5.5Total Factor Productivity – International Comparison / 68
Listing of Tables:
1.1Sample Description / 14
1.2Basic Poverty and Social Indicators / 17
1.3Composition of GDP by Sector, 1966-2004 / 19
2.1Major or Very Severe Constraints as Reported by All Formal Sector Firms in Percentages / 27
2.2Major or Very Severe Constraints as Reported by Manufacturing Sector Firms in Percentages / 28
2.3Major or Very Severe Constraints as Reported by Firms – Comparison Across Countries / 29
2.4Indirect Costs – Manufacturing Sector / 30
2.5Indirect Costs – Manufacturing Sector – Comparison across Countries / 30
2.6Indirect Costs – All Formal Sectors / 31
2.7Infrastructure Indicators – All Formal Sectors / 32
2.8Infrastructure Indicators – Comparison across Countries / 33
2.9Corruption Perception Index - 2007 / 33
2.10Perception of Government and Regulations – All Formal Sectors / 34
2.11Court System – All Formal Sectors / 35
2.12Security Services and Security Expenditure – Comparison across Countries – Manufacturing Sector / 36
2.13Regulatory Burden – All Formal Sectors / 37
2.14Regulatory Burden – Comparison across Countries / 37
2.15Licensing Process / 38
2.16Licensing Process – Comparison across Countries / 38
2.17Starting a Business / 38
2.18Licenses / 39
2.19Inventory Holdings of Most Important Input – Manufacturing and All Sectors / 39
2.20Percentage of Inputs Delivered by Road – Manufacturing Sector / 40
2.21Origin of Inputs – Manufacturing Sector / 40
2.22Customs – Manufacturing Sector – Comparison across Countries / 40
2.23Trading Across Borders / 41
3.1Major or Very Severe Constraints as Reported by Micro Firms in Percentages / 42
3.2Indirect Costs – Micro Firms / 43
3.3Infrastructure Indicators – Micro Firms / 43
3.4Perception of Government and Regulations – Micro Firms / 44
3.5Court System – Micro Firms / 44
3.6Security Services and Security Expenditure – Micro Firms / 45
3.7Licensing/Registration – Micro Firms / 45
3.8Percentage of Firms Reporting Major or Very Severe Obstacles to Registering a Business – Micro Firms / 45
3.9Regulatory Burden – Micro Firms / 46
3.10Licensing Process – Micro Firms / 46
3.11Regulatory Burden – Formal Sector versus Micro Firms / 47
3.12Perception of Government and Regulations – Formal Sector versus Micro Firms / 48
3.13Infrastructure Perceptions – Formal vs Micro Firms / 48
4.1Sources of Short-term Finance in the Formal Sector / 49
4.2Sources of Long-term Finance in the Formal Sector / 50
4.3Sources of Finance – Formal Sector versus Micro Firms / 50
4.4Sources of Short-term Financing – Comparison with other Countries / 51
4.5Sources of Long-term Financing – Comparison with other Countries / 51
4.6Access to Credit in the Formal Sector / 52
4.7Access to Credit – Comparison with other Countries / 52
4.8Collateral – Formal Sector versus Micro Firms / 53
4.9Collateral – Comparison with other Countries / 53
4.10Cost of debt and duration – Comparison across Countries / 54
4.11Reasons for Not Applying for Loans - Formal Sector / 55
4.12Loan Application/Rejection / 56
4.13Labor Regulations / 56
4.14Employment: Full-time Permanent Workforce – All Formal Sectors / 56
4.15Employment: Full-time Seasonal/Temporary
Workforce – All Formal Sectors / 57
4.16Description of Workforce – Manufacturing Sector / 57
4.17Unionized Workforce – Manufacturing Sector / 57
4.18Average Educational Attainment of Production Workers – Manufacturing Sector / 58
4.19Average Educational Attainment of Production Workers – Comparison across Countries – Manufacturing Sector / 58
4.20Firms offering Training – Manufacturing Sector / 59
4.21Firms offering Training – Manufacturing Sector – Comparison across countries / 59
4.22Absenteeism – All Formal Sectors / 60
4.23HIV Prevention Activities – All Formal Sectors / 60
4.24Determinants of Earnings – Manufacturing Sector / 62
5.1Labor Productivity (US Dollars) – Manufacturing / 66
5.2Labor Costs per Employee (US Dollars) –Manufacturing / 67
5.3Production Function Estimates / 68
5.4Total Factor Productivity / 69
5.5Extended Production Function Estimates / 69
5.6Effects of Access to Finance on TFP and Labor Productivity / 70
5.7Effects of Electricity on TFP and Labor Productivity / 71
5.8Effects of Business Licenses on TFP and Labor Productivity / 71
5.9Effects of Corruption on TFP and Labor Productivity / 72
5.10Effects of Transportation on TFP and Labor Productivity
A.1 Effects of Access to Finance
A.2 Effects of Electricity
A.3 Effects of Business Licenses
A.4Effects of Crime
A.5Effects of Corruption
A.6Effects of Transportation / 72
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acknowledgements
This report was prepared by a team lead by Giuseppe Iarossi (AFTPS) and comprising of Francisco Galrao Carneiro (OPCCE), Ricardo Gonzales (AFTPS), Sofia Silva (AFTPS), and Tania Oliviera (AFTPS). David Shiferaw (AFTPS) provided invaluable research assistance. Olivier J. Lambert (AFTFS), Thomas Muller (AFTFS), Abdelmoula M. Ghzala (AFTTR), and Stephan K.L. von Klaudy (FEU) contributed to the policy recommendations. Comments and suggestions were received by Maria Margarida Baessa Mendes (AFMAO),Alberto Chueca Mora (AFMAO), Gilberto de Barros (AFTPS), Vyjayanti Desai (CSMPF), James Habyarimana (AFTPS), Melanie Mbuyi (AFTPS), Joyce Msuya (CAFSC), Christopher Porter (AFMAO), Manju Shah (AFTPS), Dileep Wagle (AFTPS), and the participants to the concept note review and ICA review sessions. The authors are also grateful for comments received at the workshops held in Luanda in July 2007 by representatives from the Government of Angola, The Catholic University, private large companies, SMEs, and the donor community, includingTharaldsen Paul Sverre (Norway Embassy). Official peer reviewers were Jose Guilherme Reis (LCSPF), Babatunde Onitri (CAFS5), Joyce Msuya (CAFSC), and Septime Martin (African Development Bank).
executive summary
Since the peace accords of 2002, Angola has witnessed a surge in gross domestic product. The growth rate of real GDP increased from 3.4% in 2003, to 15% in 2006 due in large part to the increases in oil production and revenue. Increased oil production from new oil fields is expected to push Angola’s GDP growth rate to approximately 30% in 2007.
Angola’s macroeconomic stabilization efforts have been commendably successful. Following the adoption of the September 2003 stabilization program, Angola’s annual price inflation has consistently fallen from its 2002 level of 100%. In 2005, Angola’s 12 month consumer price inflation was 18.5%. In addition, significant increases in oil revenues have allowed for a government budget surplus of about 7% of GDP in 2005.
The lack of linkages, however, between the capital and technology intensive oil sector and the rest of the economy has meant that non-oil sectors have not experienced equivalent growth. Moreover, Angola’s heavy dependence on the oil-sector, which contributed to over 91.92% of exports in 2004 and over 80% of the state budget, and the dramatic increase in Angola’s real effective exchange rate[1], has impeded the development of Angola’s manufacturing sector.
Despite the favorable outlook in terms of mineral wealth, the Angolan economy will not enter a path of sustainable shared growth without some necessary structural reforms. Because of the long civil war and of the effects of the strong dependence on oil and diamond revenues, the private sector has not evolved outside of the mineral sectors and the quality of the country’s institutions remains low. The combination of this state of affairs creates constraints to private sector development and for the diversification of the economy.
Angola’s Investment Climate Assessment (ICA) looks in detail at factors constraining the private sector,such as the effective functioning of the product markets, financial market, infrastructure services, and the country’s legal, regulatory, and institutional environment. The ICA also provides the analytical framework to identify reform priority by linking constraints to firm level costs and productivity.
The AngolaICA report is largely based on results from a survey of 310 firms in the non-oil private sector, representing a population of 839 firms in the manufacturing and services industry in Angola.[2] The sample included small medium and large firms located in Luanda, Benguela and Huambo. The survey also included 115 micro-firms. As benchmarks, the survey utilizes comparator countries and comparator country-groupings. The comparator countries include: Algeria, Democratic Republic of Congo (DRC), South Africa, and Namibia, while comparator country-groups include: low income, Sub-Saharan Africa, and resource-rich countries.
Key Investment Climate Constraints
Access to credit is viewed as one of the most significant constraints in Angolawith over half of surveyed firms reporting it as a major or very severe constraint.Small and medium-sized firms, and firms located outside of Luanda reported access to credit to be particularly constraining. Retained earnings constitute the main source of working capital and long-term finance of firms in Angola. The banking sector accounts for only 1% and 4% of a typical firm’s total short-term and long-term financing needs respectively. Firms in Angola rely more on internal funds and less on banks than firms in Sub-Saharan Africa. Similarly, only 2% of firms in Angola have an overdraft, compared to and average of 35% in the continent.
Cost of finance is not a problem for Angola’s firms. Interest rates and collateral requirements are comparatively attractive in Angola compared to the other countries. Collateral requirements and interest rates on loans are more favorable in Angola than in the DRC, South Africa, Algeria, Namibia, and the country-group comparators.However with about 79% of loan applications in Angola rejected, the problem of access to credit is related to availability and not cost of credit.
The complexity of the application process and unacceptability of collateral are the principal reasons for low banking penetration in Angola. Over 80% of firms in Angola do not apply for a loan. One third of them do no apply because the application process is considered too complex. Similarly of those that applied for a loan over one third was rejected because the collateral provided was considered unacceptable by the bank.
Electricity is the main driver of indirect costs and affects the manufacturing sector more than other sectors. Almost half of the firms consider availability of energy a major bottleneck. Unreliability of electricity costs on average 4.6% of sales to a typical Angolan firm. InAngola 84% of all firms experienced power outages, on average 8 times per month. Electricity-related indirect costs affect more heavily large firms (9.8% of total sales), domestic firms (4.8% of total sales) and firms based in Luanda (4.9% of total sales). Generators, a costly alternative, thus, are owned by almost 70% of firms and provide approximately 31% of electricity needs.
Manufacturing firms and firms outside of Luanda contend transportation to be a significant constraint to business. Manufacturing firms in Angola lose 2.1% of their production in transit, a percentage higher than in all comparator countries (except Algeria). In addition, with imports representing 40% of manufacturing sector inputs, the average number of days to clear customs is 28 days comparatively the highest than in Sub-Saharan Africa,. Moreover, for firms outside of Luanda limited access to roads is problematic.
Corruption is considered a significant bottleneck by firms In Angola. Close to 40% of them view corruption as a major constraint, particularly large firms. Moreover, 40% of large firms report informal payments or gifts to be common “to get things done”. Corruption appears to be problematic within the court system as almost 90% of firms believe it to be unfair, partial, and corrupted. Furthermore ICAresults indicate that only 23% of firms agree with the statement that laws are consistently and predictably interpreted. In the manufacturing sector, firmsin Angola incur indirect costs due to corruption for3.4% of sales, which is lower than Algeria (7.9%) and DRC (5.1%), but greater than low income (3.1%), Sub-Saharan Africa (2.5%), and resource-rich countries (1.9%).Angola’s low ranking of 147 out of 169 in Transparency International’s 2007 Corruption Perception Index confirms the ICA’s results.
Although demonstrating a positive trend since 2000, Angola’s regulatory environment remains problematic for business.On average close to 8% of senior management time is spent with government regulations. Although comparable with other countries in the region, this burden falls disproportionately on large (14.6%) and foreign (10.2%) firms, as well as firms in the retail sector (12.9%).Business licensing and permits are reported as major or very severe constraints by a greater proportion of firms in Angola than low income, Sub-Saharan Africa, and resource-rich comparator-groups of countries. In the Doing Business indicators of 2008, Angola is ranked in the last decile in regulatory quality. Although the establishment of the Guichet Unico has improved Angola’s performances on regulatory requirements to begin a business, the costs needed to start a business in Angola are higher than all comparator countries (except the DRC) and country-group averages.
Obtaining licenses is still a lengthy process for some firms in Angola. Construction-related permits necessitate more than 3 months for large firms, but only 27 days for small firms. In addition, obtaining an import license takes on average 23 days for small firms, but requires 2 months for large firms. The time and costs needed to build a warehouse in Angola are the highest in the continent (with the exception of DRC regarding costs).
These constraints have a direct impact on costs and productivity of Angolan firms. Value added per worker in manufacturing enterprises in Angola is relatively high at around $5,000. Angola performs better than most comparator countries except South Africa, Namibia, Swaziland, and Botswana. On the other hand, Angola has high labor cost, at approximately $3,000 second only to Namibia and South Africa. The share of value added represented by labor cost in Angola is the highest in all comparator countries. Addressing the major constraints faced by firms in Angola will improve their productivity. Electricity, bribes, security and theft account for up to 10-12% of sales lost in 2006. Labor productivity and total factor productivity will increase by 6-8% if access to credit is improved, electricity is more reliable, or corruption is reduced. Similarly our survey data shows that simplifying the regulatory environment can have an even higher impact on firm productivity.
Recommendations:
- Electricity
Improve the monitoring and regulation of the electricity system. Review options for private participation in management contracts and investments. Separate generation, transmission and distribution. Ensure operability of independent regulator responsible for price setting. Increase energy generation.
- Credit
Enhance credit information infrastructure. Upgrade corporate registries, collateral registries, and public record systems. Facilitate the establishment of private credit bureaus. Reform collateral law and improve court efficiency. Strengthen accounting framework, enhance disclosure requirement.
- Corruption & Regulation
Declare political will to fight corruption, make resources available and establish an Anti Corruption Agency. Increase effectiveness of GUE by reducing the cost of starting a business. Reduce costs to execute notary deeds. Reduce time required to obtain Commercial Operations Permits and the registration with the Registry of Companies. Build up capacity for the Voluntary Arbitration Law. Shorten time to obtain licenses from the Provincial Governor and real estate registry. Reduce sot of inspections. Establish information system in the judiciary.
Introduction
Successive armed conflicts, which lasted almost three decades after independence, have devastated Angola and its economy. However, since the peace accord of April 2002, Angolans have begun a transition toward national reconciliation and lasting peace. For the Government of Angola (GoA), one of the main challenges ahead is to reconstruct the economy and reunite society after a war that has left its most visible marks on the millions of displaced that are returning to their areas of origin and demobilized former combatants that will need to be reintegrated into society. Peace in Angola has come hand in hand with a surge in GNI[3] per capita over the past years: per capita GNI rose from USD 470 in 2001 to about USD 1,980 in 2006, primarily as a result of increased oil production and revenue. Even though the national income is currently above the average level in Sub-Saharan Africa,Angola was nonetheless ranked 161st out of 177 countries in the UN Human Development Index (HDI) of 2006.[4]This underscores the magnitude of Angola’s challenges in the social sphere.
Over the period between 1990 and 2001, GDP growth exhibited an irregular pattern that is largely explained by fluctuations in domestic oil production and its international market price. In 2002 growth peaked at 13 percent, thanks largely to the peace agreement and to strong growth in oil production. Growth, however, slowed in 2003, but surged by 11.2 percent in 2004, largely reflecting, once again, developments in the oil sector. Because of few linkages between the capital and technology intensive oil sector and the rest of the economy, non-oil sectors have not shown such growth rates. The economy's dependence on oil is further demonstrated by the fact that it contributed to nearly 50% of all GDP in 2004, whereas services contributed 32% and manufacturing just 4.2%. Additionally,oil accounted for 91.92% of exports in 2004 and contributions of the oil sector to the state budget exceeded 80 percent.
Angola is one of Africa’s most resource-rich countries. It is Sub-Saharan Africa’s second largest producer of oil and the world’s fourth largest producer of diamonds, with over 12% market share.In addition, Angola is endowed with other minerals, plenty of water for hydro-electric power and irrigation, vast fertile lands, and abundant timber and marine resources.
The capital-intensive oil sector, mainly located offshore, accounts for about 50 percent of GDP. The formal non-oil economy is dominated by trade and commerce and non-tradable services. The agricultural sector’s contribution to GDP rose from 8 percent in 2004 to 10 percent in 2006, but it is still far from the 24 percent levels of 1991. Much of the explanation for the rise in food production has been the return of displaced people after the war. The informal sector has become extremely important mainly due to the disruption caused by the civil war. It is estimated that almost 70 percent of existing jobs are in the informal sector.